December 2014 A report by UNITE HERE Contact: Elliott Mallen
[email protected] 312-656-5807 Did Lone Star Funds buy a Loan Shark?* As institutional capital flows into private debt at a record pace, is Lone Star Funds’ acquisition of payday lender DFC Global outside of investors’ comfort zones? As banks and other traditional fnancial institutions globally have been required to strengthen their balance sheets following the fnancial crisis and subsequent regulatory changes, a growing number of fund managers and a wave of institutional capital have sought to fll the gap. Data provider Preqin Ltd. reported that private debt funds had raised a total of $77 billion in 2013.1 At the same time, an improving economy and a decline in corporate defaults has meant that distressed debt managers have had to search harder for deals.2 Lone Star Funds, a Texas-based institutional investment manager, has pursued a strategy of buying up distressed residential and corporate debt.3 As of September 2014, Lone Star topped the PDI 30 ranking of private debt investors.4 In July 2014, Lone Star closed its Lone Star Fund IX at $7.3 billion.5 But as Lone Star looks to deploy this capital as well as its $7 billion Lone Star Real Estate Fund III (closed October 2013), the manager’s April 2014 $1.3 billion acquisition of payday lender and pawnshop operator DFC Global raises questions about whether the current scarcity of distressed deals has forced Lone Star to look for deals in places outside of some of its LPs’ comfort zones.